See how to use the ex-dividend date in dividend investing strategies
The ex-dividend date is one of the most important markers in dividend investing but also one of the most confusing. It defines who gets the dividend and will also affect the stock price.
In this video, I’ll not only walk you through the dividend calendar dates, I’m revealing three dividend investing strategies you can use to maximize your returns.
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How Does the Dividend Calendar Work?
Now everyone in the community knows I’m a big
believer in dividends. These cash-paying investments have been shown to beat
the market and at times, that dividend yield is the biggest chunk of market
return. You see here a chart of the total market return by decade and that
dividends have accounted for about a third since 1926 but in some decades like
the 70s it’s been as much as half the total return.
But there’s a very important part of dividends
that most investors don’t understand or are a little confused. It’s the process
where a dividend is declared by the company and how it’s determined if you get
that dividend or not.
In this video, I’m going to show you the important dividend calendar dates to watch then I’ll reveal three dividend investing strategies around these dates and two tips to boost your returns.
What is the Ex-Dividend Date?
When a company decides to pay a dividend, it’s
because the Board of Directors has approved the cash payment and declares the
dividend. From this date, the declaration date, you usually have about 30 days
before they record who gets the dividend. Whenever you hear that a company has
declared their dividend, they’ll also announce what’s called the ex-dividend
This ex-dividend date is the first day that the stock trades without the dividend, it’s ex that payment. That means you need to own the shares on the day before to get the payment. It’s not shown here but sometimes investors call the day before the ex-dividend date, they call it the cum-dividend date.
So in our example here, and we’ll cover another example with Apple dividends later, here Microsoft announced they’d pay a dividend on November 29th and that the ex-dividend date would be February 14th. Usually it’s only about a month between the declaration and the ex-date but here it’s longer. If you owned shares of Microsoft at the close on February 13th, you would get the dividend.
When trading in Microsoft opens on the 14th,
those shares don’t include the dividend. It usually takes a couple of days for
the company to get the books straight to see exactly who owned the shares on
the 13th so that’s why the record date is later. Then usually a few
weeks later, the actual payment of that dividend goes out on the Payment Date.
What Happens to Stock Price after the Dividend?
An interesting thing usually happens on that ex-dividend date and this is going to feed into our dividend calendar strategies later. Because the company has committed to making that cash payment to investors, and the shares on the ex-dividend date don’t include that cash payment, the company is technically worth less than it was the day before.
If the company pays out $300 million for that dividend, and remember it’s just accounting right now because it hasn’t actually paid the dividend but that money sitting in Microsoft’s bank account doesn’t belong to the company, it belongs to those shareholders, then the company’s value is $300 million less than the day before.
Now it doesn’t always happen exactly, and
we’ll get into why, but most of the time you’ll see the share price fall by
about the amount of that dividend on the ex-dividend date. This is why it’s so
important to know these dates. You might have collected that dividend but now
the shares have fallen in value by about the same amount.
Ex-Dividend Date Investing Strategies
Now I want to share those three dividend calendar strategies you can use to take advantage of all this.
Part of understanding these dividend date strategies is understanding the taxes around dividend investing and this is really going to affect your returns. Dividends are taxed in one of two ways. If you own a dividend stock for more than 60 days either before or after that ex-dividend date. So the total time you own the stock has to be 61 days and include that ex-dividend date, then the IRS says that’s a qualified dividend and you get a special lower rate.
If you own the shares for 60 days or less though, you don’t get that special rate on the taxes. You collect the dividend but it goes on your taxes as regular income and you pay those regular income tax rates. So let’s look at a chart here because I know this can be confusing. Let’s just look at the one on the left here for individuals.
If you own a dividend stock for 61 days or more, whether it’s before or after the ex-dividend date, then you pay that capital gains tax rate on when you account for that dividend on your income taxes next year. You can see those tax rates in orange are quite a bit lower than the income tax rates in blue. In fact, for a lot of people, they may not owe any taxes on their dividends if their income is low enough.
If, on the other hand, you hold the shares for
60 days or less, You’ll pay the ordinary tax rate in blue on that dividend.
This is important to the dividend capture strategies we’ll talk about next
because obviously those higher taxes are going to affect your returns.
Dividend Capture Strategy
Now I’ve got a trick to avoid these higher taxes
that I’ll share in a minute but let’s get to that first dividend calendar
strategy. This first dividend strategy is called Dividend Capture and is by far
the most popular though I’ve got two other strategies that might help you make
The dividend capture strategy is buying the
shares just before the ex-dividend date, so buying them the day before and then
selling on the ex-dividend date. This means you get the dividend but don’t hold
the shares very long so you’re not really investing on the price moves. The
beauty of this strategy is that it’s so simple. There’s no analysis or
Now like we said, a lot of times the share price will fall on the ex-dividend date because new investors don’t get the dividend. So what a lot of dividend capture investors will do is wait during the ex-dividend day to see if the share price rebounds a little. This happens a lot actually, investors get over that knee-jerk reaction of the shares not trading with the dividend and they bid the stock price back up.
So sometimes with this strategy, you won’t see the stock price rise all the way back to where you bought it the day before but it will come up a little. This means some of the dividend gain will be offset with a loss on the stock price but you’ll still have a gain.
The great part about the dividend capture strategy is there is always a stock going ex-dividend on any particular day so you can just roll this one over every day. You buy shares of a stock that go ex-dividend the next day, sell on the ex-dividend day and immediately buy shares of another stock that go ex-dividend the following day.
Let’s look at a real-world example of the
dividend capture strategy with Apple dividends then I’ll reveal a couple of
secrets to make you more money.
Apple declared a $0.73 per share dividend on January 29th 2019 with an ex-dividend date of February 8th, 10 days away and a payment on the 14th of February. Using the dividend capture strategy, you would have bought the shares on February 7th. Remember you have to own the stock before the market opens on that ex-dividend date, in this case February 8th.
Buying the shares on February 7th would have meant paying $170.94 at the close of trading. Notice that even though the payment date, the day the company disperses the cash dividend, is on the 14th of February, it only goes out to investors that held the stock before that ex-dividend date.
Now the shares did drop on the next day, the
first day the stock didn’t include the dividend. You would have collected that
$0.73 per share dividend but the shares opened on February 8th at
$168.99 per share, losing $1.95 or about 1.1% of the price you paid.
As is often the case though, the shares
rebounded through the day and closed at $170.41 per share or $0.53 below where
you bought them the day before. You gained $0.73 on the dividend but lost $0.53
on the price for a net gain of $0.20 per share.
Now that tenth of a percent gain doesn’t sound
like much but remember, this is a one-day gain. Even that modest gain, rolled
over every day into a new dividend stock would produce a 34% annual return.
Of course the problem here is with those taxes
and trading costs. The one-day gain even at the end of the year on that $1,300
portfolio is only $1.57 so not enough to cover a $5 trading cost. To cover the
trading cost, you’d need a portfolio value of just under $4,300 to make the
tenth of a percent gain cover your cost.
That’s not to say the dividend capture
strategy doesn’t work. This was one Apple dividend date. There are others where
your return is much more, on the order of a percent a day or more, and there
are other days when you might book a loss on the strategy. I have two tips
though that are going to help maximize your returns on this strategy.
First is to focus on larger companies that pay
dividends of 3% or more. Smaller companies with a market cap under $5 billion
tend to have bigger price swings whether it’s related to the dividend payment
or not. That’s going to increase the risk that your share price drops greater
than the dividend amount on that ex-dividend date.
Getting that higher dividend yield is also going to mean a better chance at collecting more than the shares drop.
The second tip here is to use this strategy in a tax-advantaged retirement account like an IRA or a Roth. That way, no matter how long you own the shares, you won’t pay taxes on the dividends. With a Roth account, you’ll never pay taxes on the dividends you collect.
That dividend capture idea is the main
dividend calendar strategy but there are a few others that while they might not
be as popular are just as good at producing returns.
Buying Dividend Stocks Cheap
Another strategy is looking for stocks to buy
on the ex-dividend date to pick up shares at a discount. The idea here is that
investors over-react initially and the stock price usually rebounds from the
ex-dividend selloff. So if we look back at our Apple dividend example, we could
have gotten the shares for $168.99 at the open on the ex-dividend date and made
a 0.84% return by the close.
Now remember, you still have tax problems if
you sell immediately. Price gains are taxed at the lower capital gains rates
only if you own the shares for a year. If you were to sell your shares that day
then you’d pay regular income tax rates on the gain. Still though, this can be
a great way to pick up long-term holdings or even on that short-term gain if
you hold it in a retirement account so you don’t get hit by the taxes.
Dividend Growth Investing
Another less followed dividend strategy is buying stocks that have recently declared dividend increases, especially if the increase above the normal annual increase. This one is harder to follow because you have to check on the normal dividend increase and compare it after a company makes its dividend declaration. Still though, it’s a fairly simple strategy.
You look for dividends declared on the day and then go to Yahoo Finance to look at dividend history for the company. You can then compare the percentage change from the most recent dividends to see how much they have increased in the past. Yahoo Finance is a good resource for a lot of information so I’m here on the page for Apple stock then come down to Historical Data.
On this page, you find share price, dividend data and any splits on the stock. So I’ll change the dates to get five years and then go over here to show dividends only and click apply. This shows me all the dividends for Apple over the last five years and I can see when they were increased and by how much.
The idea here is that a dividend increase is a
point of confidence in the company and business growth. Management and
directors usually take a very conservative look at dividends to make sure they
have sufficient cash for growth and yield payments so increasing the dividend
means they’re confident in that continued business growth. That confidence
should result in a higher valuation for the company and higher dividends in the
There are a few dividend funds you can buy
that mimic this approach. The Dividend Aristocrats is a special group within
the S&P 500 of companies with 25 plus years of consecutive dividend
increases and a market cap over $3 billion. There are currently 57 stocks that
meet the criteria and it’s tracked by the ProShares S&P Dividend
Aristocrats ETF, ticker NOBL. You’ve also got the Vanguard Dividend
Appreciation ETF, ticker VIG, which tracks companies with a record of
consistently increasing their dividends.
The Vanguard fund doesn’t explicitly invest in the Aristocrats and has a less strict criteria on those consecutive increases but I like it better for the lower expense ratio. You see here that the two funds follow each other pretty closely so that quarter of a percent difference in fund fees each year can really make a difference.
If you love dividends as much as I do, we’ve got another video highlighting dividend stocks that pay monthly, how I find them and some secrets to dividend stock investing. Click here to check out that video and get paid every month!
Read the Entire Dividend Investing Series
7 Best Monthly Dividend FundsExpert Shares His Secrets to Dividend Growth Investing7 Monthly Dividend Funds and How to Find the Perfect ETFThree Dividend Investing Strategies for Safety and ReturnsWhat is Dividend Yield [and 3 Dividend Investing Strategies]